When do we use tax expenses?
Tax expense is used when we don’t have the right to deduct VAT. Depending on national regulations, there are cases when VAT input cannot be taken as credit VAT / Deductible VAT. For example. if we purchase something that is not for business use.
One of the UK examples:
The input tax on the purchase of cars that have any private used is blocked. Therefore, the VAT on cars with 100% business use, such as stock in trade cars for car dealers, taxis, driving schools, hire cards, pool cars etc. can be reclaimed.
In this case, there are 2 solutions:
- The VAT amount can be distributed on Inventory (it will go to expense once the COGS is formed);
- The VAT amount is immediately counted as expense (tax expense account).
We will take an example where we purchase Item 01 by the price of £100, and our vendor calculated VAT £20. Or obligation towards our vendor is £120. We don’t have the right to deduct input VAT.
Deductible (VAT) : NO – Tax expenses
The creation of the PO (procurement)
Automatically created journal voucher:
Creating a sales order (selling):
Automatically created journal voucher:
Tax preparation report in ERPAG:
Setting up parameters in QuickBooks Online:
QuickBooks Online Bill after the synchronization:
Transaction journal in QuickBooks Online:
QuickBooks Online Invoice after synchronization:
Transaction journal in QuickBooks Online:
VAT report in QuickBooks Online:
Deductible (VAT) : NO – Inventory
Creation of the PO (procurement):
In this Journal voucher, the amount will be added to Inventory account. There is no Tax expense account in this case.
Now, in the Journal voucher of a Sales order, COGS will be increased in comparison to our previous example, as there is no Tax expense account.
QuickBooks Online Journal entry and Bill also won’t have tax expense account:
Invoice journal in QuickBooks Online:
Conclusion:
When it comes to expenses, the result will be the same at the end of the process. The only difference is the moment of accounting expense. With Tax expense the VAT will become an expense when we receive the goods. While in the other case, the amount of VAT will become an expense once the COGS is formed (in most cases at the moment of selling the goods).
Everyone decides on the type based on national accounting standards and the company’s accounting policy.
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